Saturday, April 30, 2005

BOTTOM LINE: Overall, last week's market performance was slightly negative considering the decline in energy prices, strong earnings reports and fall in long-term interest rates. Friday's reversal on good volume was a positive. The advance/decline fell, sector performance was mixed and volume was average on the week. Small-cap, Cyclical and Tech shares all underperformed as worries over slowing global growth increased. Commodity-related shares were especially hard hit on concerns over rising supply, slowing global demand and a firmer US dollar. Measures of investor anxiety were mixed on the week. However, the AAII % Bulls falling back below 30% is a big positive. Future inflation expectations continue to decline as is evidenced by another fall in long-term interest rates, weakening gold shares and strengthening utility stocks. As I have stated a number of times, investors should be more concerned with a return to deflation than inflation. Stagflation is highly unlikely. The average 30-year mortgage rate has now declined from 6.04% on April 1 to 5.78%. Homebuilders should continue to outperform during the second-half of the year as rates remain low, building costs decline, consumer sentiment improves and the labor market continues its modest improvement. Retail shares will likely come under increasing pressure over the coming weeks as unseasonably mild/wet weather and high energy prices result in earnings shortfalls. However, the second half of the year should be strong and I will look to acquire shares in these stocks on weakness.

BOTTOM LINE: The Portfolio is unchanged as gains in my Computer longs are being offset by losses in my Oil Tankers shorts. I added a few new longs this morning and took profits in a few shorts, thus leaving the Portfolio 75% net long. One of my new positions is the QQQQ and I am using a stop-loss of $34.45 on this position. The tone of the market is modestly negative as the advance/decline line is slightly lower, sector performance is mixed and volume is above average. Measures of investor anxiety are mostly lower. Today’s overall market action is mildly negative, considering today’s positive economic data and the market’s oversold state. I expect US stocks to trade modestly higher into the close on short-covering, lower energy prices and bargain-hunting.

Bloomberg:- French joblessness rose in March, pushing the unemployment rate to 10.2%, the highest in more than five years.- Clear Channel Communications said it will spin off its live-entertainment unit and sell shares in its billboards business after a slump in radio advertising led the company to cut prices.- Amylin Pharmaceuticals and Eli Lilly said US regulators approved their diabetes treatment derived from the saliva of a poisonous lizard.- Crude oil is falling again, heading for the biggest weekly decline this year, on speculation that rising OPEC output will ensure that refiners have adequate inventories to meet gasoline demand during the summer months.- Northrop Grumman and General Dynamics, the top two shipbuilders for the US Navy, stand to benefit from next fiscal year’s $2.6 trillion federal budget, which would change the way ship programs are funded.

Wall Street Journal:- Devon Energy, a US oil and gas producer, is drilling under Fort Worth, Texas, to tap 27 trillion cubic feet of natural gas reserves.- The crisis at Morgan Stanley is costing the firm business.- Belk Inc., a closely held US department-store company, is close to an agreement to buy Saks’ Proffitt’s and McRae’s retail chains for between $600 million and $650 million.

Chicago Sun-Times:- Sears Roebuck employees will have their pay tied to the retailer’s profitability, and other employee benefits will be cut.

TheDeal.com:- Oracle, which already purchased PeopleSoft and Retek this year, is in discussions to buy Siebel Systems.

Beijing Antaike Information Development Co.:- Chinese copper smelters raised processing fees by 10% this month because of rising supply of the raw material.

Die Welt:- The German government has lowered its forecast for growth this year in Europe’s largest economy to 1%, from a 1.6% estimate last year.

- Personal Income for March rose .5% versus estimates of a .4% increase and a .4% gain in February.- Personal Spending for March rose .6% versus estimates of a .4% gain and an upwardly revised .7% increase in February. - The PCE Deflator(YoY) for March rose 2.4% versus estimates of a 2.5% increase and a 2.2% gain in February.- The PCE Core(YoY) for March rose 1.7% versus estimates of a 1.7% increase and a 1.6% gain in February.- 1Q Employment Cost Index rose .7% versus estimates of a 1.0% increase and a .7% gain in 4Q.- Final Univ. of Mich. Consumer Confidence for April fell to 87.7 versus estimates of 88.8 and a prior estimate of 88.7.- The Chicago Purchasing Manager report for April fell to 65.6 versus estimates of 62.5 and a reading of 69.2 in March.

Bottom Line: Consumers are continuing to spend as if confidence were high. There is very little evidence in today’s economic data of any significant impact from high energy prices. The slight decline in the consumer sentiment reading from the prior estimate was anticipated by the market. Moreover, the current conditions component of the index, which reflects American’s perception of whether it’s a good time to buy big-ticket items, actually exceeded prior estimates and is at 104.4. Disposable incomes, when adjusted for inflation, were up 3.3% last month from a year earlier. Rising incomes are one of the most underappreciated aspects of the current environment. The 1.7% rise in the core PCE deflator, the Fed’s favorite inflation gauge, is within the stated 1.5-1.75% optimal range. This is a big positive considering gas prices reached record highs in April. As well, the benefit costs component of the employment cost index rose only 1.2%, the smallest gain in three years. The better than-expected Chicago Purchasing report is also a positive, considering it reached a 16-year high the prior month. As well, the prices paid component of the index fell to 66.1 from 68.2, which is remarkable.

Late-Night HeadlinesBloomberg:- The euro traded near the lowest in 10 days against the dollar and was headed for its biggest weekly loss in five on concern Europe's economy is faltering.- Oil prices may fall further next week on speculation US refiners have enough supplies to meet demand after inventories rose to the highest in almost three years, a Bloomberg survey shows.

NY Times:- Neiman Marcus Group is set to receive bids today from three private-equity investor groups, who are expected to offer $95 to $105 a share to buy the luxury retailer.

Financial Times:- China police have text-messaged warnings to more than 30 million mobile-phone users as part of a campaign to avert any more anti-Japan protests during the weeklong Labor Day holiday that begins May 1.

London-based Times:- GlaxoSmithKline Plc said a US court has granted a ruling which may help its defense in a dispute with the IRA that could cost the company $7.8 billion.

Standard:- China has told local governments to implement rules allowing overseas companies to set up their own distribution systems.

China Securities Journal:- China has established the basic conditions to adopt a more flexible exchange rate and may allow the yuan's value to fluctuate by "several percentage points" at any time.

Business Week:- Starbucks shares may rise as much as 24% by the end of the year because of growth in earnings.- Sun Microsystems may be taken private by buyout firm Silver Lake Partners for as much a $5.50 a share, citing an unidentified hedge-fund manager close to Sun Chief Executive Scott McNealy and Silver Lake.- Dow Jones may become the target of a buyout if the stock continues to fall.- GM may be forced to restructure the company within five years by having fewer brands and few models, or face the risk of bankruptcy.

Economic Releases8:30 EST:- Personal Income for March is estimated to rise .4% versus a .3% increase in February.- Personal Spending for March is estimated to rise .4% versus a .5% gain in February.- PCE Deflator(YoY) for March is estimated to rise 2.5% versus a 2.3% increase in February.- PCE Core(YoY) for March is estimated to rise 1.7% versus a 1.6% gain in February.- 1Q Employment Cost Index is estimated to rise 1.0% versus a .8% increase in 4Q.

9:45 EST:- Final Univ. of Mich. Consumer Confidence for April is estimated to rise to 88.8 versus a prior estimate of 88.7.

10:00 EST:- Chicago Purchasing Manager for April is estimated to fall to 62.5 from 69.2 in March.

BOTTOM LINE: Asian indices are lower on more worries over slowing global growth. I expect US equities to open modestly lower on continuation of today's late afternoon decline. The Portfolio is 25% net long heading into tomorrow.

Afternoon/Evening HeadlinesBloomberg:- The Chicago Board of Trade, the second-biggest US futures exchange, plans an IPO in the second half of this year as it tries to duplicate the success of bigger rival the Chicago Merc.- Microsoft said third-quarter earnings almost doubled as legal costs fell and sales of programs to run networks increased. Revenue next year may beat analysts’ expectations.- Boeing must compete again for US Air Force work worth over $3 billion to upgrade avionics on C-130 transports because of a conflict of interest in the original contract.

AP:- Judy Woodruff, anchor of CNN’s “Inside Politics” program, is leaving CNN in June when her contract expires.

Financial Times:- Debt market investors are becoming more selective about which bonds they buy from countries that share the euro ahead of a French referendum on the EU constitution.

BOTTOM LINE: The Portfolio finished substantially higher on gains in my Commodity-related shorts. I added a few ETF shorts from various sectors in the afternoon, thus leaving the Portfolio 25% net long. The tone of the market deteriorated meaningfully into the afternoon as the advance/decline finished at its daily lows, almost every sector fell and volume was average. Measures of investor anxiety were mostly higher. Overall, today’s market action was negative. Investors are pricing in the possibility the US is slipping into recession. I strongly believe this is not the case. Growth is slowing, but not plunging. This “soft patch” will be deeper and last a bit longer than last year’s, however I continue to believe economic growth will pick back up in the second half. Modest growth, lower inflation, low long-term interest rates, a firmer dollar and lower commodity prices will make for a much better second half in US stocks. Sentiment has become much too negative and valuations are very reasonable considering fundamentals. Oil below $50/bbl. or less hawkish comments from the Fed should boost sentiment substantially.

BOTTOM LINE: US stocks are lower mid-day, spurred by worries over slowing global growth. The Portfolio is substantially higher on gains in my Base Metal and Energy-related shorts. I have not traded today, thus leaving the Portfolio 50% net long. The tone of the market is negative as the advance/decline line is lower, most sectors are declining and volume is about average. Measures of investor anxiety are mixed. Today’s overall market action is negative, considering lower energy prices, lower long-term rates, a rising US dollar and a mildly disappointing GDP report. The fact that the US dollar is rising today given the GDP report, that Europe’s growth may turn negative and that the French will likely vote “no” to the EU constitution bodes well for a firmer dollar in the near-term. A firm US dollar, slowing global demand and OPEC pumping at 30-year highs will continue to pressure crude prices. I expect US stocks to trade modestly higher into the close on short-covering, lower energy prices, a firmer dollar, lower long-term interest rates and bargain-hunting.

Bloomberg:- Jordan’s King Abdullah II said Iraq has made “great strides” since the US-led liberation of the country in March 2003 toppled dictator Saddam Hussein’s regime.- Japan’s deflation will last for an eighth year, the central bank said, making it less likely it will soon end its policy of keeping rates at zero and pumping cash into the world’s second-largest economy.- BHP Billiton, the world’s biggest mining company, said third-quarter iron ore production rose 14% to the second-highest ever.- Confidence in French President Jacques Chirac fell to its lowest since he was re-elected in 2002, after his televised appeal to vote for the European Union constitution failed to win support, an opinion poll showed.- US House and Senate Republicans reached a tentative agreement on a budget plan for the 2006 fiscal year that trims about $10 billion from spending on the Medicaid health program over five years and calls for about $70 billion in tax cuts.- Crude oil is falling for a fourth straight day, dipping below $50 a barrel in NY, as a slowdown of the global economy coincides with rising inventories.- US T-notes are rising after a government report showed the economy expanded at a slower pace than forecast in the first quarter.

Wall Street Journal:- Iraq’s Daawa party, headed by Prime Minister Ibrahim al-Jaafari, is breaking with its anti-American tradition and cultivating ties with the US in a bid to stabilize the Middle East nation.- Berkshire Hathaway’s annual meeting on April 30 will take place under a cloud of legal and regulatory scrutiny.- Marvel Enterprises is setting up a studio to make its own movies based on its characters, and it will distribute them through Viacom’s Paramount Pictures.- IBM secured a $352 million contract from the Univ. of Pittsburgh Medical Center.- Emerson Electric, Bristol-Myers Squibb and other US companies are delaying the repatriation of foreign profit pending clarification of new US tax rules.- Private equity firms such as Carlyle Group, Texas Pacific Group and KKR have been approached by Goldman Sachs and Morgan Stanley about being taken public.- Apple’s Tiger operating system to retrieve old and missing files is far better than competing built-in search functions on either the Mac or Microsoft’s Windows, Walter Mossberg wrote.- SBC Communications is to offer exclusive videos and music through an Internet site, called Blue Room.- UnitedHealth Group plans to track the health risks of drugs based on its members’ medical claims, and market the data to regulators, drug companies and others.

NY Times:- Internet phone resellers are flourishing as customers flock to buy services that replace more costly and annoying landline phones.- Sprint Corp. said customers of its high-speed residential Internet service will be able to remotely access video, music and other media files on their home computers with a new service called Personal Media Link.

Bottom Line: The GDP report showed business spending on equipment and software rose at the slowest pace in 2 years and inventories increased by the most since the second quarter of 2000. This leads me to believe economic growth began to slow to below-average levels in March. The fact that the GDP deflator only rose 3.2% when commodities were near all-time highs is a positive. The deflator has risen around this rate 4 other times just since 2000. It rose 3.6% in March 2000. The trade deficit also pressured GDP as oil imports soared. I continue to believe declining commodity prices will help boost GDP growth in the second half of the year. I want to reiterate that I believe economic growth is slowing, not plunging. Recent housing data show booming sales and low supply, which should boost housing starts over the coming months. Moreover, personal consumption beat estimates and also illustrates the continuing strength of the consumer.

10:00 EST:- Help Wanted Index for March is estimated at 41 versus a reading of 41 in February.

BOTTOM LINE: Asian indices are mixed as concerns over slower exports offset optimism over declining energy prices. I expect US equities to open modestly lower on a lower-than-expected GDP reading. However, stocks may rally later in the day as investors begin to anticipate less hawkish comments from the Fed. The Portfolio is 50% net long heading into tomorrow.

Afternoon/Evening HeadlinesBloomberg:- UK Prime Minister Blair cast doubt on Britain joining the euro currency while he is in office as he seeks a third term in a May 5 general election.- Ministers from Caribbean countries said their tourism-dependent economies might be hurt by new US rules requiring US citizens traveling to the Caribbean to carry passports.- Hedge funds attracted a record $27.4 billion from institutional and wealthy investors in the first quarter, helping to push assets to more than $1 trillion for the first time, according to Hedge Fund Research.- Tenet Healthcare said it received a notice that US regulators plan to recommend civil action related to the company’s financial reporting of Medicare and managed-care payments.- Crude oil fee almost $3 a barrel in NY, the biggest decline this year, after the Energy Dept. reported that US inventories jumped to the highest in almost 3 years and President Bush spoke on ways to cut energy prices.

BOTTOM LINE: US stocks finished modestly higher today on falling energy prices and long-term interest rates. The Portfolio finished substantially higher on gains in my Commodity-related shorts. I added a few new Energy-related shorts in the afternoon, thus leaving the Portfolio 50% net long. One of my new shorts is OMM and I am using a $19.75 stop-loss on this position. The tone of the market remained slightly positive into the afternoon as the advance/decline finished modestly lower, most sectors were higher and volume was average. Measures of investor anxiety were mostly lower. Overall, today’s market action was slightly positive. I expect tomorrow’s GDP report to fail to meet expectations. This may spur a further decline in commodity prices.

BOTTOM LINE: US stocks are modestly higher mid-day, spurred by lower long-term interest rates and energy prices. The Portfolio is higher on gains in my Homebuilding longs and Base Metal shorts. I exited a few longs as they hit stops this morning and added some new Gaming and Internet longs, thus leaving the Portfolio 75% net long. One of my new longs is VRSN and I am using a $27 stop-loss on this position. The tone of the market is neutral as the advance/decline line is slightly lower, most sectors are rising and volume is above average. Measures of investor anxiety are mostly lower. Today’s overall market action is modestly positive, considering lower energy prices, lower long-term rates, a firmer US dollar, disappointing durable goods orders and the recovery from morning losses. I expect US stocks to trade modestly higher into the close on short-covering, lower energy prices, lower long-term interest rates and bargain-hunting.

Bloomberg:- Goldman Sachs’s financial rewards for arranging the NYSE’s purchase of Archipelago exceed $100 million.- Crude oil is falling after the EIA reported supplies rose to a 35-month high.- US T-notes are rising after the government reported durable goods orders fell in March by the most in two years.- President Bush will propose using closed military bases as sites for oil refineries and speed up licensing of nuclear power plants.- European surveys showing deteriorating confidence suggest the European Central Bank may lower its benchmark interest rates this year, hurting demand for the euro, according to Goldman Sachs.

Wall Street Journal:- Three men seem to be the front-running candidates to succeed US Fed Chairman Greenspan, who’s due to step down in January. They are Martin Feldstein, Ben Bernanke and Glen Hubbard.- The House and Senate are close to agreeing on a budget for 2006 that includes $40 billion in savings over five years and would close some tax-loopholes to compensate for $106 billion in tax cuts.- XM Satellite Radio and Sirius Satellite Radio are introducing receivers for listening to satellite radio outside their normal habitat, the car.- 3Com executives have bought shares of the company for the first time in four years.

NY Times:- More than three-quarters of small US businesses polled last month plan to increase spending on technology tools such as computer software and Web sites by 20% in the next two to three years, citing a survey to be released by Hewlett-Packard.

San Francisco Chronicle:- Oakland became the first large US shipping port to automatically scan cargo containers for radioactive material.

La Tribune:- Lazard Ltd., the investment bank headed by Bruce Wasserstein, plans to have its shares trading on the NYSE on May 5:

Die Welt:- Almost one third of Europeans suffer from mental illnesses such as panic attacks, depression, the effects of stroke and migraine, citing a study by the European Brain Council.

Bottom Line: Durable goods orders for March fell 2.8% vs. estimates of a .3% increase and a downwardly revised .2% decline in February. Durables excluding transports for March fell 1.0% vs. estimates of a .5% increase and a .2% fall in February. This "very bearish" number, as some pundits are calling it, doesn't appear to me to be that worrisome. Orders for transportation equipment fell 7.8%, mainly due to a 23% decline in the very volatile aircraft component. Boeing received orders for only 11 planes last month, compared with 34 in February. Moreover, the report was skewed by the loss of working days around Easter, which was in March rather than April. The only economist to correctly forecast March's decline was Ian Shepherdson of High Frequency Economics. He is saying "these data are unreliable" and that "he expects a hefty April rebound." I believe analyst estimates of 3.5% GDP growth are at risk for 1Q as a result of a weaker-than-expected March and a higher-than-expected deflator. However, I continue to believe that U.S. growth will temporarily slow to around 2% before rebounding in the second half. I do not think a recession is likely. I also continue to believe the "contango" in crude is resulting in a temporary artificial boost to current demand. As perceptions shift over the next couple of months, a demand vacuum will send crude prices lower than most currently expect.

Late-Night HeadlinesBloomberg:- The South Korean government has yet to see any signs that North Korea is preparing for an imminent nuclear weapons test.- Australian consumer prices rose less than economists expected in the first quarter, signaling the central bank may refrain from raising interest rates again this year.- The US dollar rose against the yen and traded near an eight-day high versus the euro in Asia on speculation US growth will outpace that of Japan and Europe, heightening the appeal of US assets.- STMicroelectronics NV, Europe's No.2 maker of semiconductors, forecast second-quarter sales that may miss analysts' estimates as memory-chip prices fall.

Financial Times:- The European Union may broaden its investigation into Chinese textile exports.

Tex Report:- World nickel supply will meet demand of 1.31 million tons this year.

South China Morning Post:- Property prices in Shanghai, China's most expensive city, have begun to fall after the government introduced lending curbs and a capital gains tax. Average prices fell 15% to $914 per square meter last week.

Xinhua News Agency:- China's government is working on several plans, including improving the quality of listed companies and developing institutional investors, to bolster stock markets.

Economic Releases8:30 EST:- Durable Goods Orders for March are estimated to rise .3% versus a .5% increase in February.- Durables Ex Transportation for March are estimated to rise .5% versus no change in February.

BOTTOM LINE: Asian indices are lower on weakness in exporters after declines in the US. I expect US equities to open modestly lower on tech earnings worries and continuing concerns over slowing global growth. The Portfolio is 75% net long heading into tomorrow.

Afternoon/Evening HeadlinesBloomberg:- Amazon.com reported first-quarter net income fell to $78 million, hurt by new discounts on shipping and increased development costs.

Financial Times:- The benefits of countries opening their borders to foreign service-providers will exceed any reduction in jobs, citing the OECD.

BOTTOM LINE: US stocks finished lower today on continuing worries over slowing global growth. The Portfolio finished slightly lower on losses in my Internet and Networking longs. I did not trade in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market deteriorated into the afternoon as the advance/decline finished at its daily lows, almost every sector fell and volume was average. Measures of investor anxiety were mixed. Overall, today’s market action was negative, considering strong home sales, a rising US dollar, falling energy prices, good earnings reports and stable interest rates. Choppiness will likely continue until oil breaks below $50/bbl. or the Fed makes less hawkish comments. The fact that the Homebuilders declined today even with home sales substantially exceeding expectations, building costs declining, mortgage rates dropping and weather improving is a negative and illustrates the overly pessimistic environment that still dominates trading.

BOTTOM LINE: US stocks are modestly lower mid-day, spurred by declines in commodity-related stocks. The Portfolio is slightly lower on losses in my Internet and Networking longs. I added a few new shorts and longs this morning, thus leaving the Portfolio 75% net long. One of my new shorts is PD and I am using a $93 stop-loss on this position. The tone of the market is negative as the advance/decline line is lower, sector performance is mixed and volume is average. Measures of investor anxiety are mostly lower. Today’s overall market action is modestly negative, considering lower energy prices, a rising US dollar and strong home sales. The recent home sales data should quell fears that US growth is slowing too much. As well, I continue to see data that points to lower commodity prices in the future, which bodes well for a decline in inflation readings. I expect US stocks to trade modestly higher into the close on short-covering, lower energy prices and bargain-hunting.

Bloomberg:- Syria held an official ceremony to mark the withdrawal of its remaining soldiers and intelligence agents from Lebanon and the end of 29 years of military presence in the country.- Germany’s six leading economic institutes cut their forecast for growth this year in half to .7% as consumer spending slows and unemployment reaches levels not seen since WWII.- Japan’s household spending, buffeted by reduced overtime hours and stagnant wages, fell for a second month in March and the economy lost jobs, suggesting consumers won’t help sustain a recovery from last year’s recession.- Billionaire Ken Langone, who’s considering a takeover bid for the NYSE, wants to close its trading floor, ending the way the world’s biggest stock market has operated for more than two centuries.- Shares of Roche Holding AG and partner Genentech jumped after research showed their Herceptin treatment cut the risk of relapse among women newly diagnosed with an aggressive form of breast cancer.- IBM’s top 50 managers will give up pay increases this year after the company had trouble closing orders last quarter.- US Treasury notes are falling after a report showed new-home sales surged 12.2% to a record pace, adding to evidence that housing is still contributing meaningfully to economic growth.

Wall Street Journal:- The NYSE and Archipelago plan to offer a menu of products besides stocks as they seek to widen profit.- The US Senate may debate a bill to legalize the status of hundreds of illegal immigrant college grads in coming months.- More US corporations are starting campus recruiting drives from fall to spring, suggesting demand for candidates with a MBA degree is growing.- The National Academies, the leading US scientific advisory body, plans to issue ethics guidelines on embryonic stem-cell research today, including not paying donors for eggs or other tissues.

NY Times:- AIG found at least $1 billion more in accounting errors in an internal review than previously disclosed.- Qwest Communications may increase its bid for MCI to $32 a share if Verizon Communications matches Qwest’s $30 a share offer from last week.- Wall Street executives, including Merrill Lynch CEO O’Neal, are questioning Goldman Sachs’ role in adviser in the NYSE’s proposed takeover of Archipelago.- Neiman Marcus has received bids for its credit card unit from American Express, Citigroup and HSBC Holdings.

USA Today:- US federal lawmakers have accepted $16 million in privately funded trips since 2000, with more than half sponsored by nonprofit organizations that don’t have to say who’s footing the bill.

AP:- Wal-Mart Stores will move most over-the-counter cold and allergy medicine to the pharmacy in all of its stores by early June.

Detroit News:- GM may close more North American plants.

Boston Globe:- Massachusetts lawmakers yesterday agreed on details of a stem-cell research bill, moving the measure closer to becoming a law.

AFP:- Oil spills worldwide plunged over the past 30 years because of improvements in ship engineering.

- Consumer Confidence for April fell to 97.7 versus estimates of 98.0 and a reading of 103.0 in March. - New Home Sales for March soared 12.2% to 1431K versus estimates of 1190K and an upwardly revised 1275K in February.

Late-Night HeadlinesBloomberg:- Helmut Sohmen, the Hong Kong-based tycoon who controls the world's largest closely held shipping company, said oil tanker rates this year will be below the record reached in 2004 as more ships are launched.- North Korea said it would regard any sanctions by the UN as an act of war, after Washington said it may take the issue of the communist nation's nuclear program to the UN Security Council.- US venture-capital investments dropped 7.9% in the first quarter, as funding for biotech companies fell amid declines in biotech stocks and withdrawals of key drugs, a survey found.

Wall Street Journal:- Microsoft and SAP AG will jointly develop and sell software that combine their two main lines of business products.

Reuters:- North Korea may conduct a nuclear test by June 15, citing David Kay, a weapons expert who headed the US-led search for banned arms in Iraq.

Financial Times:- The European Union's probe of Chinese textiles is discriminatory and risks damaging trade relations with China, said Cao Xinyu, vice chairman of the China Chamber of Commerce for Import & Export of Textiles.- Merrill Lynch is leading a group negotiating with Banca Intesa SpA, to buy over $13 billion of bad loans from Italy's biggest bender by assets.

Economic Releases10:00 EST:- Consumer Confidence for April is estimated to fall to 98.0 versus a reading of 102.4 in March.- New Home Sales for March are estimated to fall to 1190K versus 1226K in February.

BOTTOM LINE: Asian indices are mixed on earnings reports in the region. I expect US equities to open modestly higher in the morning on lower energy prices and positive earnings reports. The Portfolio is 75% net long heading into tomorrow.

Afternoon/Evening HeadlinesBloomberg:- Microsoft named International Paper’s Christopher Liddell as CFO.- Adelphia Communications, the bankrupt US cable-tv operator, agreed to pay about $715 million to settle a federal fraud case, the Justice Department said.- A federal grand jury has indicted 14 members of the Chicago Mob for participating in a conspiracy that committed 18 murders, corrupted law enforcement organizations and extorted businesses, prosecutors said today.- Billionaire Kenneth Langone said John Mack, the former CEO of CSFB, will help lead a potential offer for the NYSE.- US Senate Democratic leaders said they may be willing to allow Senate votes on some of President Bush’s seven disputed judicial nominees to avoid a showdown that threatens to stymie legislation.

BOTTOM LINE: US stocks finished higher today on merger activity, lower energy prices and a bounce from Friday’s sell-off. The Portfolio finished higher today on gains in my Internet, Homebuilding and Computer longs. I did not trade in the afternoon, thus leaving the Portfolio 75% net long. The tone of the market remained modestly positive into the afternoon as the advance/decline finished modestly higher, almost every sector rose and volume was very light. Measures of investor anxiety were lower. Overall, today’s market action was slightly positive, considering the news. I would like to see stocks rise on better breadth and volume before becoming more optimistic on the near-term.

BOTTOM LINE: US stocks are higher mid-day on a bounce after Friday’s sell-off and a strong home sales report. The Portfolio is higher on gains in my Homebuilding, Networking and Internet longs. I exited a few shorts this morning and added a few new homebuilding and tech longs, thus leaving the Portfolio 75% net long. One of my new longs is BZH and I am using a $45 stop-loss on this position. The tone of the market is positive as the advance/decline line is higher, almost every sector is rising and volume is very light. Measures of investor anxiety are lower. Today’s overall market action is modestly positive, considering Friday’s sell-off, stabilizing energy prices, a rising US dollar and merger activity. Banc of America made positive comments on the homebuilders this morning:

1. Inventories of homes for sale decreased 0.2% in March, the first decline since December. 2. Inventories represent just 4.0 months supply, substantially below the six-month level that NAR (National Association of Realtors) says is a balanced market. 3. The months' supply remains just above the record low of 3.8 set in January 2005. 4. February inventories were revised 2.0% lower. 5. Absolute inventories are 3.7% below year-ago levels.

I expect US stocks to trade modestly higher into the close on short-covering, lower energy prices and bargain-hunting.

Bloomberg:- The euro dropped the most in more than a week against the US dollar and tumbled versus the yen after an industry survey showed German business confidence fell to the lowest in 19 months in April.- Boeing won an order valued at as much as $6.1 billion from ACE Aviation Holdings’ Air Canada unit for 32 jets that will cut the airline’s fuel costs.

Wall Street Journal:- General Electric is in talks to sell its self-storage unit to Prudential Financial and Extra Space Storage Inc. for about $2.5 billion.- The backlog of US IPOs waiting to be priced is smaller than a year ago, showing that the IPO environment may be worsening, citing deal tracker Dealogic.- JP Morgan Chase plans to tighten lending guidelines to curb loans and underwriting for industrial projects that may damage the environment.- Some US mutual funds that concentrate on undervalued stocks have held back from the market lately, perceiving prices to be too high.- Starz Entertainment Group’s operating income, which has dropped in half during the past two years, may fall another 50% this year as the cost of buying movies rises.

NY Times:- Arianna Huffington, columnist and former candidate for governor in California, plans to introduce a new blog to discuss politics and entertainment on May 9 to compete with the Drudge Report.- American Indians have started investing in Hollywood.- The price of oil will likely take center stage at a scheduled meeting today between President Bush and Saudi Crown Prince Abdullah at Bush’s ranch in Texas.- Former US President Clinton campaigned yesterday by satellite for UK Prime Minister Tony Blair, President Bush’s key ally in the liberation of Iraq, ahead of the May 5 parliamentary elections.

Financial Times Deutschland:- Pfizer’s Liptor cholesterol-reducer lost more than two-thirds of its German sales in the first three months of the year after a government policy change that requires patients to pay some prescription costs.

Sunday, April 24, 2005

Weekend HeadlinesBloomberg:- Japanese Prime Minister Koizumi meets Chinese President Jintao today, after three weekends of anti-Japan rallies in China tattered relations between Asia's two biggest economies.- Wal-Mart Stores today said April sales at US stores open at least one year are rising within its forecast range.- EU Trade Commissioner Mandelson will consider limiting imports of nine categories of Chinese products from men's trousers to socks and stockings in an attempt to protect producers in Europe.- Syria will complete the pullout of its forces from Lebanon tomorrow, complying with international demand after three decades in the country.- Crude oil is rising, heading for its biggest five-day rally in four months, on speculation US refiners may increase demand to boost gasoline stockpiles before the peak summer motoring season.- Hellman & Friedman LLC, a San Francisco buyout firm, agreed to buy Internet ad company DoubleClick for $1.1 billion.

Wall Street Journal:- Ken Langone, Home Depot's co-founder, is considering making a bid for Archipelago Holdings, rivaling an offer made by the NYSE.- Valero Energy agreed to buy Premcor Inc. for $8.7 billion including debt.- Google is to make changes designed to help it attract more big, brand-name advertising, which is 98% of the US ad market.

New York Times:- The expiration of the US ban on assault weapons last September didn't have the much-feared result of boosting weapons sales or increasing gun crimes.- Dell and Microsoft are among the technology stocks liked by Chip Dickson, chief US strategist at Lehman Brothers.

Washington Post:- Chinese President Hu Jintao is trying to tighten the Communist Party's grip on power and is willing to curb freedom of speech and other civil liberties to do it.

San Francisco Chronicle:- Yahoo! and Google probably will expand their ad networks to television and mobile phones as the two media converge.- San Francisco-area average monthly rents and occupancy rates were unchanged in the first quarter from the year-earlier period and when compared with the fourth quarter.

LA Times:- New Mexico Governor Bill Richardson yesterday filed a lawsuit to stop the US Bureau of Land Management from allowing oil and gas drilling on Otero Mesa, a stretch of desert grassland on federal land.

Philadelphia Inquirer:- More than half of the state legislatures in the US are considering measures that would prohibit lawsuits that claim a person's obesity problem is linked to fast food consumption.- AstraZeneco Plc CEO McKillop said that US regulators are becoming excessively careful about drug safety, a problem that drove pharmaceutical companies out of Europe.

Financial Times:- Auditors fees resulting from the introduction of the Sarbanes-Oxley act may fall by as much as 25% in 2005.-French rejection of the EU's constitutional treaty in a national referendum on May 29 would "be a catastrophe for France" and result in "the fall of Europe," said former EU Commission President Romano Prodi.- US tech entrepreneur Ed Iacobucci, who co-founded Citrix Systems, will today announce an air taxi service called DayJet that seeks to offer passengers the ability to fly to cities not served by scheduled services.

Reuters:- BMW AG's sales fell 10% in China in the first quarter from a year ealier.

Cinco Dias:- EADS will announce a US partner in the next two months with which it will bid for US military contracts.

Daily Telegraph:- GlaxoSmithKline Plc is creating a new unit that will seek agreements with smaller biotechnology companies and academic institutions to develop drugs.

Observer:- ICAP Plc, the world's largest broker of trades between banks, plans to expand in the US by starting a new broker dealer operation there.- Constellation Brands hired NM Rothschild & Sons to advise it on a possible rival bid for Allied Domecq Plc.

Earnings of NoteCompany/EstimateALTR/.15ACI/.23BYD/.52CD/.24CB/1.95KMB/.93IVX/.14PVN/.38RBK/.69SBC/.33SII/.62TRI/.74ZMH/.67

SplitsLNG 2-for-1

Economic Releases10:00 EST- Existing Home Sales for March are estimated at 6.79M versus 6.79M in February.

BOTTOM LINE: Asian Indices are mostly higher on optimism over earnings in the region. I expect US stocks to open modestly higher in the morning on a bounce from Friday's sell-off and merger activity. However, rising energy prices will likely mute gains. China's Shanghai A-Share Index is falling 1.5% again tonight and is trading at fresh six-year lows. The index is now down 28% over the last 12 months and 44% from its all-time high. The Portfolio is 25% net long heading into the week.

BOTTOM LINE: I expect US stocks to finish the week modestly higher on bargain hunting, short-covering, good earnings reports and low long-term interest rates. While I believe that US growth is slowing, an imminent recession is highly unlikely. As well, inflation measures are in the process of peaking, in my opinion. Thus, the chances of a period of stagflation are even more remote. Sentiment is currently near levels normally associated with meaningful market bottoms. Given the overall positive fundamentals and the p/e on the S&P 500's forward earnings estimates is at 15.63 and falling daily, stocks are becoming too cheap to ignore. I continue to expect the second half to be much better for US equities than the first half as inflation decelerates, commodities prices fall, long-term interest rates remain low, low valuations tempt investors, growth accelerates, the US dollar remains firm, employment continues to improve and merger activity continues. As I have stated previously, it is my belief that longer-term investors should use any further weakness over the coming weeks to begin building positions in favorite longs. Homebuilder, Retail, Biotech, Airline, Financial, Internet and Gaming shares should outperform in the second half of the year, given my outlook. My trading indicators are still bearish and the Portfolio is 25% net long heading into the week.

The positions and strategies discussed on BETWEEN THE HEDGES are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor of this blog holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in anyway, considered liable for the investment performance of any securities or strategies discussed.